Stock market experts criticised the recent government decision to impose a 0.001% tax on all Egyptian Exchange (EGX) trades, saying it will have a disastrous impact on a market already suffering from a lack of liquidity and unstable performance.
The new tax is a part of the modified economic reform programme put forward to shore up the budget deficit in order to obtain the desperately sought $4.8bn loan from the International Monetary Fund (IMF).
“The market does not welcome this tax,” said Ossama Morad, CEO at Arab Finance Brokerage. “It reacted with an immediate drop, the investor has enough problems.”
“If the government is running the country based upon an economic mentality, it should not harm an already damaged sector,” he continued. “The size transaction volumes went from EGP 2bn before the revolution to EGP 300m now, even if we compare this to other periods after the revolution, where there was a truce between Morsi and the protestors, we’ll find that we lost approximately 50% of our total transaction volumes.”
“Investors are worried about new taxes, there is an increase in capital tax beside the skyrocketing dollar price, and they already have enough,” explained Morad, confirming that the new tax’s revenues will not be high: “I estimate it at EGP 250m annually,” he said.
The tax that will be borne by the buyer and the seller is applied in a few markets whose weight is relatively low in the global economy.
Morad expected the tax to enter into force soon, since it’s included in the government’s economic reform programme that will be presented to the IMF in order to clinch the $4.8bn loan.
The technical analyst compared the government to a bankrupt merchant who searches his registers to get any income: “The government’s indecision was first reflected in the intention to impose taxes on the primary market, which was nonsense, because any Initial Public Offering (IPO), has a bigger positive effect on the economy than any taxes, so we have to encourage IPOs, and now they switch to taxes on the secondary market.”
In November the Cabinet approved the implementation of a 10% capital gains tax, on any IPO taking place on the EGX, only to be withdrawn shortly thereafter.
“I don’t think they will withdraw this tax, otherwise there will be a delay in negotiations with the IMF,” concluded Morad.
“I am not shocked by the government’s decision to impose a tax on daily trades on the stock market,” said Ehab Saeed, director of the technical analysis division of Osool Securities Brokerage ESB. “It seems they’re living in another country, and, unfortunately, they are apparently influenced by the headlines saying the stock market has gained billions.
“Honestly, I was preparing myself to hear this news at any moment,” he continued. “The indecision is obvious everywhere, so why should a tax on the stock market should bewilder us?”
“Unfortunately, some voices called for such a tax before the presidential elections, which pushed some candidates, namely Ahmed Shafiq, to pledge not to impose any taxes on stock market transactions or capital gains,” explained Saeed. “Mohamed Morsi also said there was no intention to impose such a tax in order to attract voters from the business community.”
“Actually, Morsi’s promises pushed many businessmen to vote for him, but it seems that the election’s promises are something and the reality is a totally different issue,” he continued. “Apparently the government has suddenly discovered it was useless to impose taxes on IPOs or the listed companies wishing to perform structural changes or assets revaluations, and that someone has [explained to them] the situation of the Egyptian stock market, so they modify their plan by imposing direct taxes on transactions.”
Saeed explained that there is a 90% drop in the size of transactions after the 25 January Revolution, and that as a normal reaction to that decision, transaction volumes will go further down to reach EGP 100m, which will have a disastrous effect on all the stock market’s investors, seeing that the current liquidity is unable to stem the already deteriorating prices.
As for the brokers, Saeed expected that they will be equally harmed by the decision, saying that brokerage companies are suffering losses since 2008 as a result of the low transaction values, which lead companies to cut expenditures by releasing employees or by decreasing salaries and shutting down many branches.
“The drop in transaction volumes to EGP 100m means the new tax will generate a fiscal revenue of EGP 100,000 daily,” said Saeed. “Considering the stock market works 240 days per year, the government will sacrifice the remaining investors, the employees and their families just to raise EGP 24m annually, a very small amount compared to a budget deficit worth EGP 200bn.”